June 20

Freight Market Uncertainty Is NOT The Biggest Problem In Transportation

By Josh Krause, Vice President of Sales and Marketing at OTR Leasing

Reading all of the ‘Doom and Gloom’ news articles about the ‘falling’ freight market, truck driver shortage, containerized imports, and rising fuel prices induces a high level of panic.  These headlines don’t match the sentiment with the ‘boots on the ground’ stories we hear from our 1,500* member base, who are all running Class 8 trucks.

I understand the market is never wrong, but the market is open to interpretation.  A freight recession prediction at the end of March hit publicly held carriers significantly.  This seemed counter-intuitive as the same carriers that dropped in stock value in the beginning of April, outperformed their expected quarterly revenue and earnings per share!  It seems like most uneducated voices in the marketplace are simply communicating knee-jerk responses to data instead of taking the time to understand the extraordinary complexity of our global transportation system. 

For example, let’s review the Spot Rate Market Data

Spot Rates are a price a shipper will pay to move freight from one location to another.  These are dynamic and based on current market conditions.  Roughly 10%-15% of freight is moved in this ‘on demand’ structure.  The remaining freight is moved via Contract Rates, which are pre-negotiated prices a shipper pays to move freight.  In the cyclical trucking market, the pricing favorability of one versus the other fluctuates. 

You can see the Spot Rate drop that occurred at the end of March.  The headlines communicated that this was based on the dropping of consumer demand, too many trucks, and insufficient freight.  The takeaway was a major consumer slowdown.  This is incorrect.  Looking deeper, trying to define one accurate metric for consumer demand is difficult.  Let’s look at a couple of different views.  

If you look at U.S. May Retail Sales, you can see that the country is still on an upwards growth trajectory:

Plus, the Q1 2021 Inventories are well above 2017 & 2018 and the current levels are back on pace to pre-Covid 2019.

Additionally, paying attention to the Institute for Supply Management’s May data shows that manufacturing is still expanding.  (ISM’s report is a diffusion index indicating that above 50 is expansion and below 50 is retraction).  This is the 24th consecutive month that the Manufacturing PMI (Purchasing Managers’ Index) has grown.  Additionally, paying attention to the Institute for Supply Management’s May data shows that manufacturing is still expanding.  (ISM’s report is a diffusion index indicating that above 50 is expansion and below 50 is retraction).  This is the 24th consecutive month that the Manufacturing PMI (Purchasing Managers’ Index) has grown.  

You can conclude that by increasing retail sales, pre-Covid level inventories, and continuous manufacturing growth that consumer demand is NOT decreasing.

So what has caused the softening of the spot rates?  Ken Adamo, Chief Analyst at DAT, communicated a compelling answer: “shippers paid historically high prices to ensure that more of their loads moved under a longer-term contract, reducing their need for trucks on the spot market and causing rates to soften.” Remember, only 10-15% of truckload demand is represented in the Spot Market.  Mr. Adamo continues: “At the same time, carriers’ operating costs increased because of higher fuel prices.”

Based on my experience, carriers pushed freight through contract rates BUT incurred increased time taken to deliver.  By considering time in the equation, you have a reasonable understanding that Spot Rate softening DOES NOT EQUATE to consumer spending dropping in lockstep.  

These economic indices and analyses are important to consider as we evaluate the current marketplace.  While we can attempt to understand the U.S. transportation system better, I recommend looking past the headlines and reviewing the marketplace data – plus listening to the truckers.  Listening to truckers provides significant insights into the current marketplace and potentially points to problems impacting the marketplace.  Here are two main takeaways from our’ boots on the ground’ members.

Insight #1 – Truckers Pay and Respect Shortage

You thought I was going to say there’s a truck driver shortage…It is not drivers but pay and respect.

It’s time to understand the pay shortage and the lack of respect that truckers are shown.  Consider that truck drivers are away from their homes 250+ nights a year for an average annual salary of $48,000.  If that is not challenging enough, please understand that drivers, on average, spend only 6.5 hours a day driving out of an 11-hour workday.  The rest of their allotted hours of service time is taken waiting to be unloaded or loaded at a dock!  This is tremendously ineffective!  This is shameful.  Can you perform your work duties in this environment?  The inefficiency can be caused by shippers and carriers being time agnostic to the actual driver.   

Would you be excited about $23 an hour, EXCLUDING the hours not being at home, knowing half of your day is wasted waiting on other people that show a callous disregard? No wonder drivers don’t want to stay in the industry. 

It’s time we find solutions to this pay situation, increase time spent driving, and begin to show the proper respect to those people hauling freight which is the backbone of our economy!

Insight #2 – Providing Next Generation Business Intelligence to Drivers

Historically speaking, the average driver will always run the number of miles required to hit the amount of money they need to earn.  They typically will not drive as many miles as possible to earn maximum income.  This is an important distinction.  Miles driven per year have steadily declined in the last almost 20 years.  Truck drivers ran the lowest number of miles (139,000 v 95,700) since 2003.  

During the Covid pandemic, there was no traffic congestion, and drivers adopted higher rates of speed and lower fuel economy. Often, a driver would deadhead 200+ miles to pick up a load paying $3.75 a mile!  For some, this mindset has continued, but since fuel has almost doubled and spot rates have softened, this approach is not conducive to bottom-line margins.

In today’s higher fuel cost environment, you would assume most drivers are paying closer attention to the fuel economy and their average speed (lower speed yields better fuel economy).  OTRLeasing’s telematics shows drivers are still speeding and running under the national average for fuel efficiency (6.5 MPG).  The average driver has continued chasing the high dollar loads irrespective of route efficiency and is completely agnostic of fuel costs.  Based on $5.54/gallon fuel, every driver needs to know they could add ~$8,000 annually for every 0.5 mpg efficiency increase.  

Every step to help drive efficiency needs to be addressed in this high-fuel environment.  Understanding the value of time management and route management are two solutions that need to be implemented.

The ‘Doom and Gloom’ headlines starting in March pointing to the freight market seem unsubstantiated.  A softening in the Spot Rate market cannot be misconstrued to represent the entire U.S. consumer demand, primarily when it only represents 10-15% of all freight!  We cannot control how others interpret data, and we cannot have a visceral reaction to headlines that lead to irrational and emotion-filled responses.  So, instead of getting caught up in the social media reading hysteria, be diligent in understanding the underlying contributing marketplace factors.  We can control how we are paying and treating our drivers and continue to educate them on how to increase margins and recognize beneficial behavioral pivots.  Increasing the business acumen of the backbone of the U.S. transportation system is a far better approach than headline-grabbing clickbait meant to drive uncertain panic.